The Relationship Between Financial Deepening and Economic Growth in Kenya

Abstract

Every country aims at achieving economic growth and many policies are formulated with this goal in mind. Financial development is key to improving economic growth. This study sought to determine the relationship between financial deepening and economic growth in Kenya. The study is based on three theories that is Financial Repression Theory, Finance Growth Theory and Financial Intermediation Theory. The study used descriptive research design. This study relied on secondary data sources which included the Central Bank of Kenya, Kenya National Bureau of Statistics and Market Capitalization. Descriptive and inferential statistics were used to analyze quantitative data using the Statistical Package for Social Sciences (SPSS) version 24. Findings showed a positive significant relationship between broad money supply and economic growth (r= 0.711, p-value=0.000); a negative significant relationship between interest rates and economic growth at (r= -.323, p-value=0.003); a positive significant correlation between credit to private sector and economic growth (r= 0.449, p-value=0.001); significant relationship between foreign direct investments and economic growth (r= 0.349, p-value=0.002) and an insignificant relationship between market capitalization and economy growth (r= 0.7, p-value=0.000). Policymakers should adopt favorable monetary policies that help reduce the exchange rate, to boost foreign direct investment and improving economic growth. To attract and channel foreign direct investment (FDI) to more productive and comparatively advantaged manufacturing for exports, government supply-side strategies such as government subsidies and tax refunds are proposed. This aims to boost domestic producers' productivity and export supply capacity, as well as their efficiency.